High costs cut short LNG boom

Business Council of Australia president Tony Shepherd said Woodside’s decision to scrap its LNG project at James Price Point was “a stark warning of the cost pressures in the Australian economy”.
Photo: Lee Besford

Woodside Petroleum
’s decision to scrap its $45 billion-plus LNG project at James Price Point in Western Australia signals the end of large onshore LNG developments and has sparked a crossfire of recriminations over the cost of doing business in Australia.

As Woodside cited the high costs of construction and technological advances that make a much cheaper floating platform possible, federal Resources Minister
Gary Gray
said the decision “moves investment to a newer plane, a newer technology base’’.

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Given far fewer jobs would be created with a floating platform, AWU national secretary
Paul Howes
accused the joint venture of “the great Australian rip-off’’ and demanded the government not renew the venture’s retention lease over the Browse field.

He said the Greens had provided cover for Woodside to abandon the onshore option which had cost jobs and denied the local indigenous population promised payments.

“They have sacrificed tens of thousands of Australian jobs at the altar of higher profits for Woodside and Shell executives," Mr Howes said.

Mr Gray said Australia would fulfil the vision of his predecessor,
Martin Ferguson
, that Australia would become an LNG global powerhouse, but due to technological change providing cheaper options, “it may not happen as thought’’.

Opposition resources spokesman
Ian Macfarlane
said: “I’ve been saying for some time now that we’ve probably been seeing the last greenfields LNG plant in Australia. The high dollar, the high wages, the high construction costs have just made us uncompetitive.’’

Mr Macfarlane threatened that if he became minister after the September 14 election, the joint venture would not have its lease on the Browse field renewed unless it made a concrete commitment to develop it.

“Whatever it is, we’ve got to make sure the field is developed sooner rather than later. I’m not interested in an option that is going to take five or six years to come to a final investment decision,’’ he said.

“Obviously at the moment it’s Gary Gray’s decision, but if there’s a change of government and it’s my decision, I won’t look favourably at a proposal to extend the retention leases if they haven’t got a very solid proposal to bring in terms of near term commercialising the gas.’’

Mr Gray said he would decide by the end of June whether to renew the lease over the Browse field until the end of 2014, when it would be due for a five-year renewal. He rejected the opposition’s “use-it-or-lose-it" ultimatum.

He said the government remained “absolutely confident" that the Woodside-Shell venture of the Browse field would be developed. “We know they have the will, we know they have the financial capacity to support whatever development option they choose,’’ Mr Gray said.

“Let’s let the joint venture come to their next decision.’’

Three options to cut costs

Analysts had estimated the huge project would cost $45 billion or more, but industry and political sources suggested on Friday the actual cost could have been about $90 billion.

Woodside chief executive Peter Coleman flagged three options to cut costs – a smaller onshore facility at James Price Point; a floating platform estimated to cost $15 billion; or a pipeline to existing LNG facilities in the Pilbara.

“We have spent the past eight months trying to get the costs out. We have given it the best shot we could. We have had many, many people working on this particular project. We didn’t make this decision lightly," he said.

Shell, Woodside’s biggest partner in the project, immediately voiced its support for floating LNG, rather than a reworked smaller project at James Price Point or a third option of piping the gas south to Karratha.

Woodside said that after evaluating bids by contractors to build the plant, it decided the project “would not deliver the required commercial returns". “The costs of developing anything here [in WA] are high and the productivity is lower than you’d find in other countries and so those things have an effect on the economics for sure," Woodside chairman Michael Chaney said.

Prime Minister
Julia Gillard
said the decision was not related to the regulatory regimes of either the federal or Western Australian governments. “This is a decision for Woodside,’’ Ms Gillard said.

Barnett has lost face

WA Premier
Colin Barnett
lost face over the decision as he had invested enormous political capital in James Price Point.

He was hopeful Woodside and its partners would elect to build a smaller processing plant onshore.

He said he believed the project’s Chinese and Japanese partners would not be willing to wait for a floating platform and were more likely to support an onshore option, adding the Fukushima disaster meant Japan was desperate for natural gas.

“If this project goes offshore it would lose a minimum of two, I think more likely three to five years. That will miss the need of the Japanese customer and it may indeed mean the joint venture itself misses the market opportunity," he said.

A spokesman for Mitsui, a partner in Browse LNG, said the company hadn’t decided which development option it now preferred.

Worrying sign

Opposition Leader
Tony Abbott
forecast that more major projects would be shelved.

“I regret to say that this is unlikely to be the last major investment which is delayed, reduced, or doesn’t go ahead, because the current federal government has made Australia a much less attractive place to invest with the carbon tax, the mining tax, massive increases in construction costs, a big jump in union militancy, and increases in red tape and green tape,’’ he said.

Former Kimberley Land Council chief executive Wayne Bergmann said he was not surprised by Woodside’s decision but was disappointed.

“The agreement set a new benchmark," Mr Bergmann said.

“The pressure Woodside was under in being able to get their project up and running was spoilt by people interfering with a properly authorised project. The state election in the Kimberley where the Labor party candidate – endorsed by the KLC membership – highlighted Aboriginal people are very satisfied with what the Land Council has been doing.

“I think you have seen all care no responsibility – they say they care but then they have showed no responsibility to help address the big issues that were tried to be addressed by the agreement. These groups must be made accountable for making a nuisance and making it more difficult to get this project up."

Mr Shepherd said: “This is a worrying sign cause these major projects are the main game in Australia’s economy. Missing out on opportunities like this impacts on the whole nation. If we don’t ensure major projects can be delivered more efficiently then our standard of living will be reduced.’’